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A federal judge has ruled that claims of common-law fraud and securities law violations made against a former CNN analyst for “talking up” a company’s stock in which he allegedly had a stake may proceed. However, the same judge has thrown out other claims involving securities law, RICO and state law violations against the on-air financial commentator. Denying a motion to dismiss filed by CNN analyst Courtney Smith and other defendants, Judge Joanna Seybert of the Eastern District of New York allowed to go forward several causes of action filed by a Long Island, N.Y., Internet advertising company against a now-defunct online mortgage banking firm and its principals. In Cyber Media Group v. Island Mortgage Network, 00-CV-4026, Judge Seybert ruled that Jericho, N.Y.-based Cyber Media, for the purposes of a motion to dismiss, sufficiently pleaded common-law fraud and Securities Exchange Act 10(b) violations against Smith. The ruling stems from favorable comments Smith allegedly made on air about the stock of Apponline.com, an Internet mortgage banker that filed for bankruptcy protection last year. Cyber Media, an Internet advertising firm that sells leads to professional service firms and markets itself through Internet banner ads, alleges in its $20 million lawsuit that it was persuaded to sell the company in a stock-for-stock purchase agreement to Apponline.com. Cyber Media asserts that it agreed to the sale after Apponline.com principals directed Cyber Media officers to watch a CNN program in which Smith said that Apponline.com was a “double your money stock.” Cyber Media further alleges that Smith was an officer in the venture capital fund Inculab, whose stock was directly tied to Apponline.com, and that he benefited from the “double your money stock” statement. Although she permitted the common-law fraud and 10(b) claims to survive, the judge rejected Cyber Media’s claims that Smith violated �� 18(a) and 20(a) of the Securities Exchange Act, the Racketeer Influenced and Corrupt Organizations Act, New York General Business Law, and the covenant of good faith and fair dealing. She also dismissed the claims of unjust enrichment. Smith also was implicated in a separate lawsuit in California, which alleged that in 1999 he took a $3 million payment to tout the stock of a company known as Genesis Intermedia on CNN, CNBC and Bloomberg Television. The shares reportedly climbed as high as $25 before they plummeted upon the announcement of an investigation into company practices, the class action complaint alleged. Smith’s attorney, Judith R. Cohen of Squadron, Ellenoff, Plesent & Sheinfeld in New York, declined to comment on the Apponline.com case, saying that she had not seen Judge Seybert’s Jan. 15 ruling. INVESTOR EXPECTATIONS In reaching the decision regarding Smith’s alleged common-law fraud and securities law violation, Seybert was not persuaded by his argument that the statements attributed to him were not actionable because they were no more than “puffery” and were understood as such by reasonable investors. Smith asserted that his statement was an “optimistic prediction” about the possible performance of Apponline.com’s stock and not a statement of fact. Noting varying tests among the federal circuits regarding financial projections under � 10(b), Justice Seybert found that the statements alone were opinions or predictions and may not have been material. But she then questioned whether a reasonable investor would consider as significant Smith’s statements about Apponline.com as a “double your money stock” in making an investment decision to purchase the stock. “While it seems that it would be unreasonable for an investor to base an investment decision on one analyst’s assertion that a particular stock’s value would double or that such an assertion could be more than mere puffery or optimism, reasonable minds may differ as to whether the particular statement is material,” she wrote. Given what the judge noted as the “very lenient pleading requirements for materiality,” she denied the motion, especially because the plaintiffs’ amended complaint charged that Smith knew that the statement was false at the time he made it. Also named as defendants in Cyber Media’s lawsuit are Apponline.com principals Edward Capuano, Jeffrey Skulsky and Paul Skulsky. In addition, Apponline.com general counsel, Patrick A. Reilly, its Chief Financial Officer Cindy Eisele and two accounting firms are defendants. Those accounting firms are Werblin, Cassucio & Moses and Citrin, Cooperman, both in New York. The judge denied the other defendants’ motions to dismiss pertaining to alleged violations of common-law fraud and various sections of the Securities Exchange Act, but granted the motions with respect to RICO, state law, good faith and breach of contract causes of action. With $121 million in liabilities, Melville, N.Y.-based Apponline.com, a residential loan reseller, filed for Chapter 11 protection in July 2000. The New York State Banking Department had suspended its license for questionable banking practices. Steven R. Schlesinger, with Garden City, N.Y.-based Jaspan Schlesinger Hoffman, represented Cyber Media and its original shareholders.

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